1st ASIA SUKUK SUMMIT 2009

The global Islamic capital market (ICM) has seen a spectacular proliferation of Sukuk (Islamic securities) issuance over the last two years. The total market including government, quasi-sovereign and private issuances now tops an estimated US$200bn, and the signs are that there is no slow down despite the impact of the credit crunch and the chaos in the global financial markets.

While the Gulf Cooperation Council (GCC) countries and South East Asia will continue to dominate the Sukuk market, with Saudi Arabia and Malaysia by far the most important and innovative ones, the signs are that Sukuk issuance holds potentially huge promise in emerging markets in East Asia and the developed markets of the UK and the US.

In Asia, the Japan Bank for International Cooperation (JBIC) is on the verge of issuing its debut Sukuk in Malaysia, while other countries in the region are planning sovereign issuances. The Hong Kong Government is currently reviewing its taxation framework to see how it can facilitate tax neutrality for Sukuk and other Islamic financial products to bring them on par with equivalent conventional financial products. In the UK, Kitty Ussher, the City Minister and Economic Secretary to the Treasury, says she is "hopeful" that the UK would issue a sovereign Sukuk in the wholesale sterling market in 2009. Market players are indeed keen for the UK to spearhead the development of a Euro-Sukuk Market as the bank of England did in leading the Eurobond Market in the 1970s. In the US, a Texas gas company has already originated the first Sukuk out of North America.

Wary of the impact of the global credit crunch, which seems to have affected the Western banking majors and economies the most, but attracted by the high GDP growth economies of Asia and the huge projected project spend in the region, investors from the Middle East and Malaysia, armed with huge petrodollar surplus liquidity, are increasingly looking to diversify their investments both in terms of asset classes and locations. Not surprisingly, China, Hong Kong, India, Indonesia, Japan, Singapore and Malaysia are experiencing a boom in interest from these investors. This interest is further consolidated by the fact that the flow of trade, especially GCC oil, gas and petrochemical exports, is firmly in the direction of the above Asian economies.

Following the highly successful inaugural London Sukuk Summit along the theme 'Strategies for Today; Demystifying Islamic Capital Market Products' held in June 2007 and the equally successful follow-up London Sukuk Summit in June 2008 along the theme 'Gearing up for UK Sukuk Originations', the organizers ICG Events, with the encouragement of global market players, are expanding the concept to organise Sukuk Summit in other important locations.

Hong Kong, the world's third largest financial centre after London and New York in terms of stock market size and fund-raising ability, is one such centre that has embarked on a series of exciting initiatives to facilitate Islamic finance in the region, especially Mainland China. As such, ICG Events with the support of Hong Kong�s Treasury Markets Association (TMA) will organize the 2009 Asia Sukuk Summit along the theme 'Towards a New Silk Route for Islamic Finance' on 18th-19th February 2009 in Hong Kong.

In ancient times, the famous Silk Road was China's link to the outside world and a route for trade and exchange of art, music, culture and religion. Indeed, in a speech last year, Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, the central bank, alluded to the New Silk Road being spearheaded by the globalisation of Islamic finance especially eastwards. Chinese politicians have also stressed this ambition and Hong Kong sees itself "at the heart of the New Silk Road providing a gateway to business and financial opportunities." The rise of Islamic finance is inextricably linked by many commentators to the very renaissance of the Silk Road.

Hong Kong is bullish about developing Islamic capital markets and structured finance for investment and deals especially in Mainland China and in the region. The island is positioning itself as the natural choice as a gateway to doing business, including Islamic investments, in China. "There is a lot of interest from Middle East investors wishing to invest into China,� stresses Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA). �Hong Kong is the fund-raising platform for China outside the mainland which is like a window that meets with the international markets. So if investors from the Middle East want to access China, they will look at Hong Kong, which we see as serving as a bridge between the Middle East and China," he adds.

The rationale behind Hong Kong's drive to become an international Islamic capital markets hub is simple: "We recognize that Islamic finance is one of the major growth areas in the financial services industry, and Hong Kong being an international financial centre involved in financial intermediation activities, we feel that we need to provide a full suite of financial products to market participants round the world. And obviously if you don't have Islamic finance you are missing a big market segment. We have been talking to the market players about the opportunities, potential and the impediments in developing Islamic finance in Hong Kong. The market players came up with a very positive report, stressing that they see great potential in the Islamic finance sector," explains Mr Yue.

Due to the very rapid GDP growth in China over the last few years, which last year touched 11% to 12% per annum, Hong Kong's economy has similarly benefited from this growth. In 2007, GDP growth in Hong Kong totaled 6%, although this year it is projected to slowdown slightly to 4% or 5% because of the uncertainty in the international financial markets due to the global credit crunch as a result of the sub-prime mortgage crisis in the US.

The exposure of Hong Kong banks to the collateralised debt packages in the sub-prime mortgage market is very small, and as such the Hong Kong market per se is very little affected. There is plenty of liquidity in the local market. However, there is a certain degree of impact from the US market to the Hong Kong market via the China market, because of the strong economic and trade relations between China and the US.

Hong Kong strongly believes that it can provide that gateway to Middle East and Malaysian investors and serve as a platform with a critical mass of the market players.

"Hong Kong does not talk. Hong Kong does," says Eddie Yue. In November 2007, Hang Seng in Hong Kong launched an Islamic China Offshore Index Fund off the Dow Jones Islamic Market (DJIM) Index. Within the first five weeks, the fund amassed US$50m and is expected to top US$100m before end 2008. DJIM last year also launched an Islamic BRIC (Brazil, Russia, India and China) Index.

Malaysia's CIMB Group also listed its pioneering Exchangeable Sukuk on the Hong Kong Stock Exchange � the third Sukuk to be listed on the exchange thus far � earlier this year. The underlying assets are in China through a company, Paxon, which is listed on the Hong Kong Stock Exchange and which operates a number of department stores in Mainland China.

Hong Kong's Mortgage Finance Corporation is also in talks with its Malaysian counterpart Cagamas Berhad to develop a mortgage guarantee product for the Malaysian market � both conventional and Shariah-compliant versions. Market players also see huge potential for Islamic long products and plain vanilla Sukuk issuances.

Elsewhere in Asia there are also exciting developments in the Islamic finance space. Following the opening up of its Islamic financial market three years ago and the rebranding of the Malaysian Islamic Banking System earlier this year by the government of Prime Minister Abdullah Badawi into the Malaysia Islamic Financial Centre (MIFC), the sector has seen a welcome rebirth in cross-border and intra-regional transactions and risk.

Malaysia hopes that the MIFC will become the one-stop centre of choice for the origination, issuance and trading of Islamic capital market and treasury instruments; and of Islamic banking, Takaful and education in general. The MIFC also aims to promote the internationalization of the Malaysian IFIs through strategic alliances and joint ventures between them and foreign entities.

In Japan, the Financial Services Agency (FSA) has similarly submitted an amendment to the banking law to the Diet (Japanese parliament) which may allow Japanese banks to offer Islamic finance products through a subsidiary.

"The implication of this amendment," says Tadashi Maeda, Director General and Special Adviser for Energy & Resources at the Japan Bank for International cooperation (JBIC), "is to allow the Japanese bank to do some asset trading, which implicitly includes Ijara (leasing), Murabaha (cost-plus financing) or Istisna (construction finance) products in Japan".

"Through our conversation with the private sector, they are trying to get involved through a step by step approach. First they are trying to engage in the business of Sukuk as an arranger, say through their foreign subsidiary in London, Kuala Lumpur or Dubai. These Japanese banks have already approached the FSA in Tokyo to get permission to do this. The FSA did not give them any express permission but at the same time said that it did not have any objection to them arranging Sukuk."

Mr Maeda is confident that the amendment to the law will be adopted in 2008. He predicts that within three years, we may see Islamic financial products being offered to ordinary Japanese customers by local high street banks. JBIC is also forging alliances with various entities such as Bank Negara Malaysia and the Jeddah-based Islamic Development Bank (IDB).

He also sees huge potential for Islamic finance among Japanese utilities especially in the power, electricity, and oil and gas sectors. "These are utilities that have huge potential to issue Sukuk and other Shariah-compliant securities," he maintained. "They have the motivation to get more connection with oil producers in the GCC countries. They have to learn from the experience of Saudi Basic Industries Corporation (SABIC) Saudi Electricity Company (SEC) and QGPC in issuing Sukuk and accessing Islamic finance. I hope the SABIC and SEC issuances will pave the way for Japanese utilities to do the same thing. They have to face more the international reality of Islamic finance products and services," he stresses.

The recent launch of the Daiwa FTSE Shariah ETF (Exchange Traded Fund) marks a further boost for the global Islamic capital markets and the increasing involvement of Japanese financial services companies in the sector. The Daiwa ETF is based on the FTSE Shariah Japan 100 Index, which was launched in April 2008.

It is promoted by Daiwa Asset Management, the second largest asset manager in Japan after Nomura Asset Management, with funds under management of $96.34bn at end February 2008. Daiwa, which has a strong relationship with FTSE and the Singapore Stock Exchange (SGX), decided to list on the SGX because of its strong transparency and its aggressive ambition of becoming an international Islamic capital markets hub.

"Daiwa," explains Jun Murofushi, Managing Director of Daiwa Asset Management (Europe) Ltd, "is expanding its global activities. We have fund management activities in North America, London, Singapore and China. At the same time Islamic finance is increasing at a phenomenal growth rate. We hear about the funds under management in the sector between $1 to $2 trillion dollars. We have a good relationship with SGX in Singapore and an equally strong connection with FTSE, which first proposed the idea of a Shariah-compliant ETF to us. SGX is very keen to developing its role in Islamic finance especially capital markets and wealth management."

With all these activities, the 2009 Asia Sukuk Summit is a must-go-to event to keep market players and regulators informed about the latest developments in the Islamic capital markets in general and Sukuk and securitisation in particular, which allows for an industry-led focused analysis of various regions and at the same time provides a platform for regional cooperation and eventual convergence.

While the tried-and-tested vanilla structures will continue to flourish in a market that is still taking off; there are already signs that some of the more sophisticated originators and investors are looking for more value-added and innovative structures. The market has seen a few true-sale securitisation; convertible Sukuk; exchangeable Sukuk; and back-to-back multiple Sukuk with financing facilities such as Istisna. In addition we are now seeing the emergence of the first Islamic Fund of Hedge Funds; the first Shariah-compliant exchange-traded commodity (ETC) platform and more Islamic exchange �traded funds (ETFs).

We are also seeing new innovations in asset allocation in Sukuk, securitisations and other financing facilities - ranging from rights and obligations on petrochemical marketing contracts; pools of electricity meters and the tariffs due on them; and payment through mobile phone airtime. Asia has also pioneered social Sukuk issuances involving Waqf properties.

These are indeed exciting times for the Islamic finance sector and the challenge is to consolidate these structures and to come up with even more imaginative structures and products. The market developments whether they be in Dubai, London, Hong Kong, Singapore, Bahrain, Jeddah, Hong Kong or Kuala Lumpur are underpinned by progress in enabling regulation, legislation, innovation, Shariah governance, diversification and market education.

While Dubai, London and Kuala Lumpur may have the competitive edge, in reality they are obliged to cooperate and co-exist with other centres. As such there will be a greater confluence of interests, with some centres capitalizing on niches. Eventually these regional confluences will result in convergence into a global Islamic capital and debt market.

The 2009 Asia Sukuk Summit is specifically aimed at harnessing these developments to keep you informed about the Sukuk market developments and innovation; to provide a platform for dialogue with your peers; and to give you a voice in contributing to the future direction of the Islamic debt and capital markets!

Future Demand Dynamics

The future demand dynamics of Sukuk issuance are as follows:

The potential of Sukuk has not been fully utilised as a monetary policy and debt management tool.
Diversification of source of funding � more corporates will use Sukuk as a component of a mixed financing strategy. This would apply especially to the oil, gas, petrochemcials and transport sectors.
Mutual funds, pension funds and other investment funds are now increasingly seeing investment in Sukuk as a desired option in terms of investment portfolio mix. As such capital markets will be more driven by investment in such instruments.
The huge spend on capital projects earmarked over the next decade, means that Islamic finance and Sukuk will feature strongly.
There is now greater market education of Sukuk structures especially with the involvement of the Western banking majors and the emergence of CIMB, DIB and others as lead managers.
There should be more derivative-type products entering the wholesale market including profit rate and currency swaps; Islamic repos; Islamic hedge funds; Islamic exchange-traded funds (ETFs), Shariah-compliant exchange-traded commodities (ETCs), etc.
The incidence of social issuances will increase as Waqfs try to raise funds for renovation and leveraging of their assets.
Sukuk will also feature in the financing mix of major infrastructure projects at the national level; at the municipality level; and at the Public-Private Finance Initiative level; and the corporate level especially in sectors such as transport, healthcare, affordable housing, leisure facilities and education.